Can You Sell a House With a Tax Lien on It?

Yes, you can sell a home even if it has an IRS tax lien against it. However, there will be extra paperwork involved, and the IRS will have a right to the proceeds of the sale, up to the amount of your tax debt. There are a few different ways to navigate the sale, depending on the situation.

This post outlines the basics, but to get legal guidance tailored to your situation, contact us at Timothy S. Hart Law Group today.

Key takeaways

• You can sell a home with a tax lien attached, but the IRS may be entitled to some of the proceeds.
• If the proceeds cover the lien, get a payoff number and have the closing company send payment to the IRS.
• Get the IRS to discharge the lien from the home if the proceeds only cover some (or none) of the tax lien.
• You don’t have to sell – you may be able to set up payments or take out a loan to pay off the taxes.
• To get a loan against your home, you’ll need the IRS to subordinate its lien to the lender’s lien.

What to expect if there’s a tax lien against your assets

Tax liens attach to all of your real and personal assets- including your home. Most tax liens attached to your private residence stem from unpaid individual income taxes, but liens can also arise if you have personal liability for business taxes or a Trust Fund Recovery Penalty against you.

The lien gives the IRS the right to the proceeds of the sale of your home. For example, if you get $200,000 from selling your home and there’s a $100,000 lien against you, the IRS gets $100,000. If you only receive $50,000 from selling your home, the IRS would be entitled to all of it.

There’s no way around this – you will not be able to transfer the title until the IRS gets its cut.

How to sell a home with a tax lien against it

This part of the process is the same, whether you’re dealing with your primary home, a vacation home, or an investment property. The exact steps vary based on the value of the lien and the proceeds you’re getting from the sale:

• The sale covers the full value of the lien – in this case, just contact the IRS lien payoff department. They’ll give you the number that needs to be paid, and the title company will take care of the rest. For example, say you sell your home for $1.2 million. You owe $600,000 on the mortgage and $200,000 on an IRS tax lien. The title company will send those amounts to the mortgage company and the IRS, and you’ll get a payment for the remaining $400,000.
• Sale covers some of the value of the lien – In this case, you’ll still have to send all of the proceeds of the sale (that aren’t due to other lienholders) to the IRS, but since some of the lien will remain unpaid, you’ll need to have the IRS discharge the lien from the property before the sale can move forward. For example, say you sell your home for $500,000. You owe $450,000 to the mortgage company, and you have an IRS tax lien for $100,000. The closing company will pay off the mortgage and send $50,000 to the IRS. You won’t get any cash from the sale, and you’ll still have a $50,000 tax lien against you.
• Sale doesn’t cover any of the lien. Now, imagine that you’re selling your home for $300,000 and you owe $300,000 on the mortgage, but you also have an IRS tax lien for $100,000. To get the sale to move forward, you’ll need the IRS to discharge the lien. To get your discharge request approved, you may need to prove to the IRS that you’re selling the home for its fair market value. If the IRS believes that you’re selling it for less than its value to avoid taxes, they won’t approve the discharge.

Can you sell the home to a related party?

Yes, but the IRS may require additional proof that you’re selling the home for its fair market value. In contrast, there may be less scrutiny if you sell the home to someone at arm’s length from you. With all home sales, regardless of whether or not a tax lien is involved, you have to note if the sale is to a related entity.

Transferring property with IRS tax liens

What if you don’t want to sell your home? What if you want to give it away? Well, unfortunately, when you owe back taxes to the IRS and there’s a lien against your assets, you cannot just give away assets. In fact, that may constitute tax evasion in some cases.

However, that doesn’t mean a transfer is impossible. It just means that it can be difficult. You may need to satisfy the lien in another way before you can transfer the property. Here are the main options:

• Pay off the tax debt in full – That will cause the IRS to release the lien, and then, you won’t owe it anymore.
• Set up a payment plan that requires lien withdrawal – Lien withdrawal means the lien is no longer part of the public record, and thus, it won’t complicate a property transfer. Typically, the IRS will agree if you owe less than $25,000, set up direct debit payments to pay off the balance within five years, and make at least three monthly payments.
• Request a discharge – Again, a discharge is when the IRS removes the lien from a specific piece of property, and typically, they’ll only do so if that helps to get the debt paid faster. So, this may not be possible if you want to transfer the property, unless it has very little to no equity.

Keep in mind that when you apply for various types of relief, such as an offer in compromise or certain types of innocent spouse relief, you have to note whether or not you have transferred any property in the last few years. Your business will also have to disclose property transfers if you ever file a 433-B to apply for relief on business taxes.

Can you use the home as collateral on a loan?

You don’t have to sell your home to pay your back taxes. If that’s the main reason that you’re considering selling, you may want to look into taking out a loan to pay off your tax liabilities. If you have equity in your home, a lender will typically loan you money based on the equity, but if there’s already an IRS lien in place, the IRS will need to subordinate its loan to the lender’s loan.

You can request lien subordination to take out a loan against a home or other property that has already been paid off in full. Or you can request subordination to take out a second mortgage, home equity loan, or a home equity line of credit. In either case, you’ll need the IRS to agree to subordination before you will be able to get loan approval.

Mistakes to avoid

Selling your home with an IRS tax lien is complicated, but again, it’s not impossible. To protect yourself, avoid these common errors.

• Assuming you can’t sell – As explained throughout this post, there are many ways to sell a home with a tax lien against it.
• Undervaluing the home – If the IRS believes that you’re selling the home for less than its value to avoid paying the tax lien, they may not agree to discharge the lien from the property.
• Not reaching out to the IRS quickly – You must reach out before the sale, because it can take a while for the IRS to process the paperwork. Not doing so may cause you to miss deadlines and potentially lose your buyer.
• Failing to disclose related buyers – If your failure to disclose is an attempt to evade paying taxes, you may face criminal charges.
• Selling when you don’t want to – Generally, you don’t have to sell your home to cover unpaid taxes. If you’re only selling to get money, consider working up a payment arrangement with the IRS. This will prevent them from seizing your home, while also allowing you to get caught up on your back taxes.

But perhaps the biggest mistake people make is not to get legal help. You need to work with a tax attorney who focuses on resolution work and has a deep understanding of how to navigate property sales and tax liens. That’s where our firm comes in – we have the knowledge and experience to help you get through this challenge.

FAQs about selling homes with tax liens

Take a look at these additional questions and answers about selling homes with tax liens attached to them.

What if the state files a tax lien against me?

States can also file tax liens against individuals or businesses for unpaid state taxes. The options vary from state to state, but most states work similarly to the IRS in terms of letting you request lien discharges or subordination.

What if there’s a property tax lien against my home?

Most states, including New York, have processes that allow the state or county to seize a home for unpaid property taxes and auction off the home. However, there is generally a redemption period where you can buy the home back after paying for seizure costs, interest, and penalties.

What if there are multiple liens against my home?

Generally, liens take priority based on when they are filed. For example, if you took out a mortgage to buy your home, the mortgage lender will have priority. Then, if the state files a tax lien before the IRS, the state will typically take priority over the IRS but behind the mortgage company. You will need to address all of these liens before the sale can move forward.

What if I inherit a home with an IRS tax lien against it?

If you own the property jointly with the person who has died, you can typically continue to own the property with the lien attached. However, if your name is not currently on the title, you may generally need to resolve the lien before you can transfer the title.

Can I sell a deceased person’s property with a tax lien attached?

Yes, but you will need to pay off as much of the lien as possible with the proceeds of the sale. If the proceeds don’t cover the full lien amount, you’ll need to request a discharge before selling the home.

Get tax help now

Whether you’re facing a tax lien, a wage garnishment, a bank levy, or another tax problem, we can help you deal with the IRS and/or the state. We’ll help you navigate home sales and find lasting resolutions for your federal or state tax debt on the business or personal level.

You don’t need to live in stress and fear – instead, you can get assistance now. To learn more about how we can help, set up a consultation by contacting us today.